Tag Archives: National Venture Capital Association

About 664 days ago Internet and Online Business

Report on VC Funding Sends Mixed Message

How you view a new report by Thomson Reuters and National Venture Capital Association on venture capital fundraising really depends on whether you’re a glass-half-full or glass-half-empty type. According to the report, VC funds have raised $2.7 billion in the second quarter of 2011—but the number of firms raising funds has declined “significantly.” READ MORE »

About 1818 days ago Tools on Managing Technology

Angel, Venture Capital, or Bootstrap?

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Greg Linden was one of the key developers behind Amazon’s famous recommendations system — the system that recommends books, movies, and other products to Amazon customers based on their purchase history. He subsequently went to Stanford and picked up an MBA. In January 2004, he launched a startup named Findory to provide everyone with a personalized online newspaper. You cannot imagine anyone who could be more qualified to make a startup like this a success. Yet Findory shut down in November 2007. In a brilliant post-mortem, Lindensays his big mistake was to bootstrap his company while trying to raise funding from venture capital firms; he just couldn’t convince them to invest. He should have raised his funding from angel investors instead. This is an important decision every startup founder has to make — where to raise their funding. Fortunately, there are resources on the Internet that can help you make the right decision. The three viable sources at the very early stages of a company are: Friends and family. Or yourself, if you can afford it. The Web provides an assortment of resources to read up on bootstrapping, from online communities of entrepreneurs to Guy Kawasaki’s blog. Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator. (My firm Cambrian Ventures is also in this category, although we are currently not actively seeking investments) Venture Capital (VC). These are private firms that manage pools of equity capital that is invested in high growth, entrepreneurial companies. The National Venture Capital Association provides resources about VC as do such private firms as VentureOne and vFinance. To understand which option is best for your startup, you need to understand how investors evaluate companies. While investors evaluate companies across a range of criteria, three that stay consistent are: Team, Technology, and Market. Angels and VCs evaluate them in different ways. Here’s how. How VCs evaluate startups Market. Venture Capitalists want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be attacking a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within four to five  years, then a VC is not the right fit for you. It’s often OK to use consumer traction as a substitute for market opportunity — many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity. Team. Venture Capitalists use simple pattern matching to classify teams into two buckets. A founding team is deemed “backable” if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise the team is considered “non-backable.” Technology. Venture Capitalists are not always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area — either as a founder or as an outside advisor. Here’s the rule of thumb: to qualify for VC financing, you need to pass the Market Opportunity test and at least one of the other two tests. Either you have a backable team, or you have nontrivial technology that can act as an entry barrier. How angels evaluate startups There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are attacking or the technology you are developing. Other kinds of angels are usually not very high value. Here’s how angels evaluate the three investment criteria: Market. It’s all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company. Team. The team needs to include someone the angel knows and respects from a prior life. Technology. The technology is something the angel has prior expertise in and is comfortable evaluating without all the dots connected. Here’s the angel rule of thumb: you need to pass any two out of the three tests (team/technology, technology/market, or team/market). I have funded all three of these combinations, resulting in either subsequent VC financing (e.g., Aster Data, Efficient Frontier, TheFind ), or quick acquisitions (Transformic, Kaltix — both acquired by Google). I’ve written about the stories behind the Aster Data investment and the Transformic investment previously on my blog.  In both cases, my personal relationship with the founders, as well as my passionate belief in the technology, played big roles in the investment decisions. Friends and family or bootstrap This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in this “bootstrap mode.” An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder’s ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that’s actually good for the founder’s career: shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer. Back now to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel’s point of view — if you pick an angel investor who has some passion for personalization technology. The company doesn’t pass any of the VC tests. Given this, Linden should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo, or Microsoft, among many others. Of course, hindsight is always 20/20! I have deep respect for Linden’s intellect and passion and wish him better luck in his future endeavors. For further reading, I highly recommend Paul Graham’s excellent article How to Fund a Startup. Anand Rajaraman is co-founder of the Kosmix with consumer properties www.RightHealth.com, www.RightAutos.com and www.RightTrips.com.  He sits on the board of several technology companies and currently teaches at the Computer Science department of Stanford University.  His latest thoughts and discussions can be found at http://anand.typepad.com/datawocky.

About 1818 days ago Internet and Online Business

Angel, Venture Capital, or Bootstrap?

our beautiful site

Greg Linden was one of the key developers behind Amazon’s famous recommendations system — the system that recommends books, movies, and other products to Amazon customers based on their purchase history. He subsequently went to Stanford and picked up an MBA. In January 2004, he launched a startup named Findory to provide everyone with a personalized online newspaper. You cannot imagine anyone who could be more qualified to make a startup like this a success. Yet Findory shut down in November 2007. In a brilliant post-mortem, Lindensays his big mistake was to bootstrap his company while trying to raise funding from venture capital firms; he just couldn’t convince them to invest. He should have raised his funding from angel investors instead. This is an important decision every startup founder has to make — where to raise their funding. Fortunately, there are resources on the Internet that can help you make the right decision. The three viable sources at the very early stages of a company are: Friends and family. Or yourself, if you can afford it. The Web provides an assortment of resources to read up on bootstrapping, from online communities of entrepreneurs to Guy Kawasaki’s blog. Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator. (My firm Cambrian Ventures is also in this category, although we are currently not actively seeking investments) Venture Capital (VC). These are private firms that manage pools of equity capital that is invested in high growth, entrepreneurial companies. The National Venture Capital Association provides resources about VC as do such private firms as VentureOne and vFinance. To understand which option is best for your startup, you need to understand how investors evaluate companies. While investors evaluate companies across a range of criteria, three that stay consistent are: Team, Technology, and Market. Angels and VCs evaluate them in different ways. Here’s how. How VCs evaluate startups Market. Venture Capitalists want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be attacking a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within four to five  years, then a VC is not the right fit for you. It’s often OK to use consumer traction as a substitute for market opportunity — many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity. Team. Venture Capitalists use simple pattern matching to classify teams into two buckets. A founding team is deemed “backable” if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise the team is considered “non-backable.” Technology. Venture Capitalists are not always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area — either as a founder or as an outside advisor. Here’s the rule of thumb: to qualify for VC financing, you need to pass the Market Opportunity test and at least one of the other two tests. Either you have a backable team, or you have nontrivial technology that can act as an entry barrier. How angels evaluate startups There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are attacking or the technology you are developing. Other kinds of angels are usually not very high value. Here’s how angels evaluate the three investment criteria: Market. It’s all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company. Team. The team needs to include someone the angel knows and respects from a prior life. Technology. The technology is something the angel has prior expertise in and is comfortable evaluating without all the dots connected. Here’s the angel rule of thumb: you need to pass any two out of the three tests (team/technology, technology/market, or team/market). I have funded all three of these combinations, resulting in either subsequent VC financing (e.g., Aster Data, Efficient Frontier, TheFind ), or quick acquisitions (Transformic, Kaltix — both acquired by Google). I’ve written about the stories behind the Aster Data investment and the Transformic investment previously on my blog.  In both cases, my personal relationship with the founders, as well as my passionate belief in the technology, played big roles in the investment decisions. Friends and family or bootstrap This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in this “bootstrap mode.” An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder’s ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that’s actually good for the founder’s career: shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer. Back now to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel’s point of view — if you pick an angel investor who has some passion for personalization technology. The company doesn’t pass any of the VC tests. Given this, Linden should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo, or Microsoft, among many others. Of course, hindsight is always 20/20! I have deep respect for Linden’s intellect and passion and wish him better luck in his future endeavors. For further reading, I highly recommend Paul Graham’s excellent article How to Fund a Startup. Anand Rajaraman is co-founder of the Kosmix with consumer properties www.RightHealth.com, www.RightAutos.com and www.RightTrips.com.  He sits on the board of several technology companies and currently teaches at the Computer Science department of Stanford University.  His latest thoughts and discussions can be found at http://anand.typepad.com/datawocky.

About 3615 days ago E-Commerce

Facing the Online Music

The Inc. Survey The battle over online music may seem to be about college kids illegally downloading Eminem. But entrepreneurs also have a stake in the debate. And interestingly, they seem somewhat skeptical of the recording industry’s efforts to rewrite intellectual property law. Some history: Napster first enabled people to share digital music files over the Internet in 1998. In response, the Recording Industry Association of America won passage of the 1998 Digital Millennium Copyright Act, which affirmed stringent copyright protection. The group successfully sued Napster. More recently, it has tried to quash file-sharing services such as Kazaa and Gnutella. Some might assume entrepreneurs would back the recording industry, since intellectual property is often a small company’s only significant asset. Yet a new survey of Inc. subscribers found a lack of support for efforts to curtail file sharing. Fully 40% of respondents say sharing music files with friends and co-workers does not constitute copyright infringement. What’s more, those surveyed are not keeping employees from using the company network to download music. Though only 17% say they know for sure that employees download media files, 63% do not block access to file-sharing sites, and 64% have no policy prohibiting employee downloads. The RIAA has warned companies that failing to take these steps could provoke legal action in the future. A backlash against the recording industry may explain the results. Big companies like Intel, Gateway, and Apple certainly worry that the RIAA will go too far in restricting the new technology. Mindful that digital music drives PC sales, they have lately come to the defense of so-called fair-use rights, the basic privileges afforded a purchaser of copyrighted material. “A lot of people think there’s something unethical about their CD burner, and that’s just not true,” says Gateway spokesman Brad Williams. Among entrepreneurs, the concern seems to be that the RIAA would, in the words of Mark Heesen, president of the National Venture Capital Association, “sue new innovation into oblivion.” Indeed, music labels Universal Music and EMI are suing the venture capital firm Hummer Winblad simply for funding Napster. In a statement, the labels argue that “businesses (as well as those individuals or entities that control them) premised on massive copyright infringement…should face the legal consequences for their actions.” Heesen argues that the suit is simply the work of “an 800-pound gorilla who has a vested interest in an existing technology and is using its might to crush any new technology that makes theirs obsolete.” For entrepreneurs, the scenario is all too familiar — it’s no wonder they don’t feel the RIAA’s pain.